Amid budget gap, 'fantastic' ideas joust with fiscal reality

"For several years, we kept the budget wolf from the door . . . but the wolf is back," according to the Gov.'s speech.

"For several years, we kept the budget wolf from the door . . . but the wolf is back," according to the Gov.'s speech. (Lori Shepler / Los Angeles Times)

Michael RothfeldLos Angeles Times Staff Writer

He has prided himself on thinking big, and used his larger-than-life persona to advocate grand visions for California's future.

But as Gov. Arnold Schwarzenegger begins his fifth year at the helm of the state, he is hemmed in by the past, staring at a fiscal crisis much like the one he was elected to solve. That leaves little room for the "fantastic" ideas on which he has staked his reputation as a visionary.

Instead, political observers said, he will be forced to confront a basic and perennial question: whether California voters are willing to pay for the programs they want.

On Tuesday, Schwarzenegger, a Republican who in the last two years has been closer to Democrats, will use his State of the State address to lay the groundwork for a broad array of cuts to state services, according to his aides.He will call on everyone to share the pain of closing a budget gap the administration has projected at greater than $14 billion -- without raising taxes. And he plans to renew previously failed efforts to change the state budget process.

Two days later, he will lay out the sobering details. He will declare a fiscal emergency and offer proposals for slashing state programs now and outline a slim budget for the next fiscal year.

Those plans are likely to draw the battle lines for the year between his administration and interest groups, and between Democrats and Republicans in Sacramento, many of whom are already girding for a fight.

"The governor has set the stage effectively by asking that the state agencies cut spending across the board," said Ron Nehring, the state Republican Party chairman. "The choice is very clear. Either government has to prioritize its spending or the alternative is to raise taxes, which is something that Republicans will continue to resist."

Democrats, who control the Legislature, are insistent on increasing state revenues through higher taxes or closing tax loopholes.

"We're not going to cut our way out," said state Senate President Pro Tem Don Perata (D-Oakland). "I don't think anybody, unless they're really on the fringe, believes that providing healthcare for children or services in the home for a paraplegic is the wrong use of government."

Yet even as the governor asks the public to accept dramatic reductions, he pushes on with his ambition of the last year: to dramatically expand health insurance. He will have to deliver the message that programs must be cut to avoid raising taxes while simultaneously asking voters to raise taxes on cigarettes, employers and hospitals to support a new $14.4-billion health plan.

"The state should not come to a standstill because there is a budget problem," said Adam Mendelsohn, the governor's communications director. "Clearly, for Gov. Schwarzenegger the budget is the first priority, but that's not going to stop him from addressing healthcare and education."

Jack Pitney, professor of government at Claremont McKenna College, said it was natural for the governor to want the healthcare expansion for his legacy.

But, he added, "the deficit will overshadow everything else."

"It's tempting for him to think about big goals, but he has to think about the big deficit first," Pitney said. "He has to either cut spending or raise taxes. Either of those courses is going to be very politically unpopular."

Education funding

Schwarzenegger plans to cut education funding in a period his administration had previously billed as "the year of education." Mendelsohn said Schwarzenegger would still make education a priority by, for example, trying to improve school performance, which Mendelsohn said could be achieved without high expense.

And Schwarzenegger will revisit policies he has tried before without success. Administration officials said he would portray his fiscal battle as an effort to fix California's money problems permanently by automatically curtailing constitutionally required spending increases when revenues are flagging.

The state can already do that with approval from the Legislature, though it can be politically difficult.

Schwarzenegger and his aides are discussing a proposal that would require the state to set aside money when revenues are healthy so it can use them -- while limiting spending -- in tougher years.

Former Republican Gov. Pete Wilson, who pushed a large tax increase during a budget crisis in 1991, spoke on behalf of Schwarzenegger in a Saturday radio address about the need for such a plan.

"It is terribly unwise to continue to allow the vast majority of state government spending to be driven by formulas . . . that cannot be changed without legislative approval," Wilson said. "So we absolutely must put in place a mechanism that requires that money be reserved in robust years to pay for needed state services in bad times when revenues fall."

Art Pulaski, leader of the California Federation of Labor, which represents 2 million workers, said that "this perpetual pinch of not raising taxes is going to, I think, send the state into a downward spiral."

"The question is whether we're going to stop the growth of California," Pulaski said. "A spending cap means we're going to regress -- we're going to stop growth. None of the visionaries have said we are going to put a cap on the state."

Starting each year of his tenure, Schwarzenegger has unveiled a visionary new goal, with mixed results.

First, he wanted to reorder the state bureaucracy, which did not come to pass. In 2005, his "year of reform," he sought to overhaul public pensions, impose merit raises for teachers and make other far-reaching changes.

But those efforts ended in a resounding defeat in a special election he called.

Then Schwarzenegger sought to shore up the state infrastructure in 2006, culminating in a $42-billion bond issue approved by voters.

Health legislation

His 2007 "year of healthcare" has dragged into this year. Legislation is still pending in the state Senate, and Schwarzenegger and Assembly Speaker Fabian Nuñez (D-Los Angeles) have proposed a measure for the November ballot to finance nearly universal insurance.

State Sen. Sheila Kuehl (D-Santa Monica), who has a competing vision for healthcare change, leads a Senate committee that will hold hearings on the pending legislation.

She has questioned the affordability of the plan for some voters and said the governor may be too invested in it.

"I think the governor believes that his major role is to initiate necessary change," Kuehl said. "The unfortunate thing for him throughout his entire term so far has been that in simply presenting a big idea, he then feels wedded to the idea, even as it looks less and less like a good idea."

Last year, despite his call for "post-partisanship," Schwarzenegger was unable to bridge the gap between Democrats who control the Legislature and Republican state senators who wanted more spending cuts.

The budget was passed nearly two months late because the Republicans, whose votes were needed, balked. "Many of the issues we brought up during the budget debate have come true," said Senate Republican leader Dick Ackerman of Irvine.

With the fiscal situation much more dire this year, legislators on both sides could be more entrenched, and Schwarzenegger's role as a mediator more difficult.

"It puts post-partisanship to its first real test," said Bill Whalen, a research fellow at Stanford University's Hoover Institution and a former Wilson speechwriter. "When the state is bleeding red ink, it's hard to keep everybody on the same page."